One auction and its impact on the ‘Welfare State’

ScreenHunter_1420 Feb. 27 07.27

By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.

A few weeks ago, I attended an auction in a popular suburb of Melbourne’s inner east.

The home was an attractive four-bedroom townhouse on roughly 260 square metres of land, and initially quoted at $700,000 ‘plus’ – very typical of the type of accommodation featured in the area.

As is commonly the case in Melbourne, the quote was ‘stepped up’ in the final week of the campaign to ‘$750,000 ‘plus’ – albeit, the listing agent informed me more than once he had $800,000 “covered” and a mere blink at recent comparable sales, indicated a price well in excess of $850,000, or even $900,000, considering the level of demand and lack of comparable listings being marketed.

This was confirmed during the auction, when a neighbour I’d casually interacted with, leaned over, and in little more than a whisper, told me “I know the vendor – she wants $1 Million” and considering the property didn’t reach its reserve until $900,000, I suspect she was correct.

With competition from nine bidders, the property sold in front of a crowd of 100 or so for $1,011,000, and the agent, delighted with the result, wasted no time swooping in on the ones who missed out, to share information of ‘similar’ listings currently for sale.

Needless to say, it’s a story that drives many Australian’s irate, with the focus inevitably aimed at the misleading way in which it was quoted – which is an issue I’ll explore further in another column. However, this isn’t what should drive our sense of injustice to kick into gear.

The Undeserving Poor..

Debate is currently rife in Australia surrounding the ‘relentless’ costs of our welfare system, with social services minister Kevin Andrews heralding it ‘unsustainable,’ whilst looking for ways the government can cut entitlements to the ‘undeserving’ poor.

The review has concentrated primarily on disability payments, and Newstart ‘job seekers’ allowance, which keeps the ‘income-less’ in relative poverty.

“Work is the best form of welfare!” was the statement Mr Andrews used, and considering the uptick in unemployment, with industries such as Ford, Alcoa, Qantas, SPC, Sensis, Telstra, Shell and Toyota, moving jobs and business off shore. A fall in the participation rate – due in part, to an asset rich, income poor retiring population – and a rise in part time and casual positions over that of full time, concerns are warranted.

In the 2013-14 Budget, the Government correctly stated that, “Australians value a fair society” and underlined its commitment to a tax system that provides a strong and stable funding stream for important public services such as “health, education and, Disability Care” whilst “rewarding innovation and productivity,” for economic growth. And on an international scale, our tax-transfer system is perceived as ‘comparatively’ generous.

According to the OECD, Australia’s ‘Robin Hood’ economy redistributes more to the poorest 5% of the population than any other member country, whilst the much-criticised policies of ‘middle class welfare’ are seemingly the lowest.

We’re deemed to have the most “unique” and “target efficient” social security benefits in the OECD, apparently yielding “significant gains” to both the economy and society, and when compared to the USA which has the highest income inequality amongst the ‘rich’ nations by some significant degree, we look comparatively ‘healthy.’

Yet, despite its many reforms, and varying degrees of success, shaped in part by demographic changes (more women entering the labour force for example,) and a small reduction in high end salaries during the GFC – widening disparities between incomes have continued unabated since the mid 1990s, and as the labour market struggles, there’s nothing to suggest the trend will stop.

Mind the Gap..

There are all sorts of reasons to narrow the gap between the rich and poor, and prevent an ever-widening chasm – significantly, the way that income is invested into the economy and the roll over effect to society.

Income inequality and economic growth can only work hand in hand, when individuals are enabled to strive for greater heights from a foundation of equal opportunity – the basis of which is education.

As economist and inequality expert Andrew Leigh commented late last year;

“Education is the greatest force that we’ve developed, not only for boosting productivity, but also for making Australia more equal” ensuring “the circumstances in which you’re born don’t determine the circumstances in which you die.”

Yet our schooling system is becoming increasingly segregated. The correlation between poor performance and social disadvantage are stronger here than any other comparable western nation. If our tax and transfer system were meant to offset this, you’d have to assess its been an abject failure.

Why?

Australia has enjoyed a period of economic prosperity, which over the last 23 years has been nothing short of remarkable. According to Credit Suisse ‘Annual Global Wealth Report,’ we’re the “richest people in the world,” with a median wealth ‘each’ of US $219,500.

Over the past year alone, Australia added an estimated 21,000 millionaires to the population. Yet, contrary to what the textbook version of economic theory would have you believe – household savings, reaped from an economy surfing the wave of a commodity boom, have not flowed into business investment, or nurtured productivity and education standards in the young.

As noted in the Credit Suisse assessment, our ‘riches’ are “heavily skewed towards real assets” a manifestation of “high urban real estate prices” acquired and generated through the destructive cyclical impacts of a property market, which, as I emphasised last week, sees the gains from income growth and investment, flow directly back to the land.

Both homeowner and speculator..

Home ownership is seen as one of the great pillars of our collective culture. It’s assessed to improve health and school performance in children, activate social engagement as well as reduce local crime.

However, the way we go about promoting ownership, is to nurture a system that teaches rising land values – outside of any productive activity such as renovation or effective utilisation of the resource – is due reward for having saved hard and got onto the ‘ladder’ in the first place.

Our tax system is skewed toward ownership, with policies, that according to last year’s Grattan report, provides potential benefits to homeowners worth $36 billion a year, or $6,100 on average per ‘household’ through items such as capital gains and pensioner eligibility test exemptions. Investors (or those choosing to rent and invest) reap $7 billion a year, or $4,500 on average ‘each,’ by way of negative gearing rules and the capital gains discount introduced in 1999. Whilst renters, one in four households, see no gain – unless their income is low enough to require welfare assistance.

In effect, we’re an economy that relies on ever-rising values of irreplaceable fixed assets, to fund the individual wealth of its nation – and this is only achievable if policies are in place to ensure values remain high and climbing, and debt levels ‘affordable.’

Capital growth..

Speculation and investment are two sides of the same coin. When we assess a good business model for example, we speculate that the productive activity that flows from that investment, will build on a growing base of demand, and through competition and diversity, go onto produce a profit.

Yet the ‘Capital Growth’ in land values does not occur by way of some abject force of nature. Everything that makes our cities ‘liveable’ comes from the collective ‘investment’ of our taxpayer dollars – which we ‘grudgingly’ pay in the first place, to provide the social amenities needed to form the base from which we can all progress.

This would include, community services such as, transport, parks, roads, trains, trams, medical facilities, and most importantly, schools.

Yet, it is also these facilities that produce the needed demand for real estate that pushes values upwards. Not through the efforts of the individual homeowner, but the productive efforts of the taxpayer – renter, homeowner and investor alike.

Housing on its own is worth nothing without the infrastructure that surrounds it and rising land values are ‘reward’ for nothing other than unwontedly buying into a system that – under the current structure – promotes inequality and forces social polarisation.

Unlike our business model above, we can’t ‘make’ more land in a particular location to fulfil the demand produced from the facilities our tax system both funds and maintains. Therefore effective utilisation of the resource is vital.

However, the speculative process alone, along with the added impact of a tax system that impedes turnover by way of stamp duty at one end, and capital gains at the other, simply feeds a process of hording.

This is because most advantage best from investment into housing through the process of “buy and hold” – leveraging the ‘equity’ to produce needed funds, rather than selling. A system that drives underutilisation and ‘land banking.’

But land is fixed in location; therefore we must always ‘hop’ over it to find the next predicted ‘hot spot’ to raise our families, until this too becomes out of reach through the process described above – like a cruel game of musical chairs.

Back to the beginning..

Let’s go back to the case study I cited at the start of this article. The reason the four-bedroom townhouse attracted such strong demand in the first place, is because it’s located in a top government school zone.

Only high-income earners can afford to live in this zone, and no doubt they feel – through their income tax contributions alone – they pay their fair share toward facilitating the opportunity for their children to obtain that higher education. As the OECD said, our tax and transfer system is highly progressive – the “rich” pay more. Or do they?

Allowing for stamp duty, the new owner who purchased the townhouse would have paid $1,066,605 yet despite two years of effectively ‘stagnant’ growth in 2011/2012, the median price in the suburb has escalated close to 60% from $850,000 in December 2009, to $1,355,000, therefore they probably assess it a ‘worthy’ investment.

As for those who arrived early in the process, to paraphrase what one homeowner relayed to me some time back – she has earned more from the ‘capital growth’ of her home over the past 10 years or so, than she has in earnings.

Outside of a ‘crash’ or the demise of the education facilities provided, there is nothing to suggest prices in this school zone will drop. From the tight zoning regulations alone, and rising population of immigrants and local buyers looking to advance their children’s education, the very ingredients to attract a consistent source of buyer demand are set in place – and rents will rise accordingly.

The taxpayer continues to subsidise the school, whilst the gains are capitalised in rising land values, which flow directly to the individual homeowner not the school or community, keeping values high and placing further pressure on the public purse to fund additional services, whilst underfunded schools, in the over populated ‘fringe’ suburbs, start to produce an English style education ‘class divide.’

Under such a system, we are not subsidising the ‘poor,’ we are ‘paying’ the wealthy. Yet, it’s clear, if we’re to navigate the structural changes ahead and keep unemployment low, whilst at the same time, reduce the projected burden on the ‘welfare state,’ our economy is reliant on maintaining a highly skilled work force, and for this to occur, an elevated level of tertiary education and business investment is vital.

A better model of ‘Welfare..’

Notwithstanding, the correct way to fund local schools would be via broad based and effectively administered land value taxation, which in its purest form – as advocated by the Classical Economist, Henry George – would result in a single tax on the unimproved value of land to replace all other taxes, which hamper productivity – significantly income tax.

George’s ideas won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman as well as other influential figures including Winston Churchill, Adam Smith, and more recently, Chief economics commentator at the ‘Financial Times’ Martin Wolf, and author and economist Fred Harrison – although, notwithstanding, a single tax would be unlikely to hold water in current political circles.

The Henry Tax Review commissioned by the Government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases” proposing that stamp duty (which is an inconsistent and inequitable source of revenue) be replaced by a broad based land tax, levied on a per-square-metre and per land holding basis, rather than retaining present land tax arrangements.

Whilst arguments over school funding will likely continue, centred in the political battle over funding of the suggested Gonski reforms. Unless we narrow the gap in education, we’ll never narrow the broadening gap in income, and consequently, the growing burden on our welfare state.

Therefore – when times comes that the ‘chatter’ around affordability, finally evolves into ‘real’ action – a broad based LVT should form an important part of both the debate, and solution.

59 Responses to “ “One auction and its impact on the ‘Welfare State’”

  1. Ronin8317 says:

    Apart from education, you also need access to capital. If you do not have a parent who can guarantee your loan (via their home), your ability to start a business is severely limited. In contrast, the banks will lend money to almost anyone for investment properties.

    • Strange Economics says:

      Yes – fairest would be to add a land tax on the residential home, who are benefiting from the school demand , that will be used to fund the local school – the school zoning is a defacto private school system – many studies show school results are mostly on the socio-economic level of the students.
      (and include it in the assets test for the pension).Of course the school zone system could be easily fixed – so that all of a much larger local area ballot for it, rather than purchase it, for example.

      • pjkkerr says:

        Agreed. Taxing away the increased value of land near a good school will indeed be more equitable, but won’t do much to solve the good school/bad school problem, because probably the biggest determinant of how good a school is, is the quality of the pupils it teaches in the first place. If these are motivated, and from an information rich educationally pushy/supportive background (upper middle class?), then both well-off parents and the best teachers will do what it takes to be part of that school. The less well off will still not get a look in.

  2. OMG says:

    A nice piece

    I am guessing the auction you attended was in the Balwyn/Balwyn North Area

    However, the speculative process alone, along with the added impact of a tax system that impedes turnover by way of stamp duty at one end, and capital gains at the other, simply feeds a process of hording.

    .. hmmm, there would be a lot of property investors that would love to see stamp duty and CGT removed, that would definitely bump up prices

    Good overview of the system, basically, money makes money so my advice is from what I have learnt

    1. Get in early
    2. Save
    3. Take advantage of what is on offer to you

    The price of properties will rise in the inner east of Melbourne due to scarcity and increased demand caused by cashed by migants, don’t miss the boat lol

    • Pfh007 says:

      Indeed OMG, go hard while the music plays – just keep close to the chairs and don’t be afraid to use your elbows (or more likely a high pitched whine) when the time comes.

    • fewlish says:

      Failing your guess, I would have thought Glen Waverley.

      Friends of mine did the cost benefit analysis of buying v renting (to send the kids to GWHS) and it was unbelievably skewed to renting, especially when you factoring in the 15k plus saving PER CHILD per year to send the kids to an equivalent ATAR outcome based school.

      Added to this is the 3 year attendance rule meaning a short stay in the catchment area whilst saving up for a neighbouring suburb then moving on. Job Done.

      Little way off for me personally, but starting to plant the seeds at home myself!

      • OMG says:

        Glen Waverley’s median is nowhere near the $1.3 million mark, but that suburb is in a similar situation

        Have found it very easy to rent out property in the catchment as there are many parents looking to send kids to GWSC

        I wouldn’t buy there now, way overheated due to demand from Chinese buyers, renting is a good option and then you can always buy somewhere cheaper like Burwood East or Blackburn South

        Old homes on large blocks are selling like hotcakes in the GWSC zone, anything with 600 sqm is selling for $1 million to most likely Chinese living in China that quickly knock down and put up a new build

        Units are less in demand there and you can get better value

      • squirell says:

        are these schools actually that good? has anyone done a basic comparison based on the proportion of asian students? Lets be honest here, they work fearfully hard and as a result get high marks. I would put ethnicity above socio economic factors although the 2 overlap.

      • fewlish says:

        My thinking is regardless of prevailing ethnicity, the average outcome of the school is a pretty compelling factor when choosing where the pride and joy’s go. And GWSC seems to regularly provide ATARs above 90 for 50% of its ‘graduates’.

        If a group-set of teachers are used to well behaved and disciplined pupils, and you would like your kids to be in that environment to reap those outcomes, then the decision has been made. And lets face it, picking up mando/canto et al. whilst popping an ATAR of 90+ may not be such a bad thing!

        One point to note from my friends is that most (perhaps 90%) of the families they know through the school use extra-curricular tuition in conjunction with the syllabus so the final scores are somewhat overrepresented of what the actual school is providing. But hey, still cheaper than private! (insert old school tie rebuttal here…)

      • DMc says:

        @squirrell,
        I’ll look past the low-level racism in your comment to give you an answer;
        Even if the school’s results are skewed upward by a group of hard-working students, an average student surrounded by hard-working high-achieving students will tend to work harder and achieve higher themselves.
        So even if what you are saying is true, those hard-working students would tend to drag up the results of the other students.

        Edit: @fewlish, so the final scores are somewhat overrepresented of what the actual school is providing
        That’s why you need to look at scores adjusted for socio-economic background.
        See here for an example. Look to the explanation of “SIM” halfway down the page.
        http://www.myschool.edu.au/ResultsInNumbers/Index/67127/GlenWaverleySecondaryCollege/45546/2012
        This is for up to year 9 NAPLAN, not sure if similar assessment are available for final-year.

      • squirell says:

        DMC – no intention to be racist, just making an observation – asian kids work bloody hard. And i think the socio economic analysis should be supplemented by ethnic analysis to get a true picture. But you are right, the school is important. Perhaps the real point I am making is there is a positive feedback look here. If a low performing school finds itself with an increasing number of stidents from a highly motivated demographic, the reputation of the school will rise and attract more of the high achiever types which of course will improve the environment for all including those from an average achieving demographic.

      • OMG says:

        I didn’t take your comment as being racist, a shame that DMC would go down that path

        I live there in the late 90′s early 2000s and always paid attention to the ATAR scores over the years

        Glen Waverley and Mount Waverley and Balwyn always had very good scores, even before the ethnic mix changed in Glen Waverley

        Indeed, many of these kids attend kumon on saturday mornings from an early age and there is pressure on them to succeed

        I think what has changed if that due to the money flooding in from the mainland there is little hope of finding a house in the catchment for under $900k

        LJ Hooker Glen Waverley reported that for the Jun-Dec period of 2013 that 90% of buyers in the GWSC zone were Chinese, 60% residents (living) in China

      • DMc says:

        a shame that DMC would go down that path
        I don’t think it was particularly bad or harmful, but it was a generalisation based on race. That is racism.

        Try changing the wording just slightly…
        has anyone done a basic comparison based on the proportion of female students? Lets be honest here, they don’t work very hard and as a result get low marks.
        I’d say that is sexist. But take this as a comment; this is a business and economics blog after all, so I don’t think we need to get into a long discussion trying to define racism.

    • squirell says:

      yes – and i am guessing the property was bought by someone from China as they seem to place a ridiculouse premium on good school zones. Balwyn North is in my opinion dreary and not particulalry well located to transport etc.
      I own a home nearby in a not so good school zone – i was thinking if every household in our zone (maybe 5000?) contributed $200 we could pay $1m per year to get a famous principal (eg Rosa Storelli) and a crack admin team. Once word gets around prices will rise by far more than the $200 investment.

      • OMG says:

        I like your thinking, a good strategy

        Balwyn North is dreary, quiet, it is nice though and safe

        We are seeing a real shift in demographics in these areas, I think the % of Chinese born resident in Balwyn has doubled every 5 years and is now at 12%, I assume Balwyn North is heading that way

        Glen Waverley was at 25% at the last census, definitely much higher now

        These present some opportunities

        1. Open a Kumon learning centre
        2. Dumpling restaurant
        3. Buy in school catchment zones

      • Pessimist says:

        Here is a tip.Buy around new high achiever schools in Berwick and Werribee. Most of the student population in these schools are chinese.

      • squirell says:

        Pessimist – I agree. As I posted above i suspect the performance of the school is largely based on the demographic which then creates a positive feedback loop ie hard working super motivated Chinese will do better regardless of the school, a higher proportion will improve the reputation of the school which in turn attracts more motivated parents, better teachers etc etc etc.

      • AB says:

        “yes – and i am guessing the property was bought by someone from China as they seem to place a ridiculouse premium on good school zones.”

        It seems like a couple of you know a fair bit about Chinese buying habits, so let me ask a question.

        Why is it that the Chinese apparently place so much emphasis on high school catchment zones? Why don’t they just send their kids to private schools and live in more desirable areas?

        (No offence intended to those who may live there, but there are about twenty other suburbs I’d prefer ahead of Glen Waverley if I was a cashed-up Chinese immigrant. I’d probably start around Hawthorn/Camberwell/Canterbury and send my kids to one of the many private schools in the area.)

      • fewlish says:

        Outside of the sunk private school costs, the ability to send your kids to a free public school that has been proven to provide an on par or higher ATAR outcome whilst being able to internalise the cost savings into a CGT free asset is pretty appealing…

        edit – when it comes to money, even the blind can see!

      • OMG says:

        AB,

        It is a fair question

        Having lived in the area I can tell you it has changed over time, GW didn’t have many Chinese from the mainland prior to 2007, most were Malaysian born Chinese

        Since then I have met a few mainlanders and asked why here? they had heard from friends that Glen Waverley was the place to buy, this was months before arriving, I asked what is it about GW?

        It is “our place” they said, has “our restaurants”, value keeps going up, the schools weren’t a big issue to them except they knew that the school would help increase the value of the homes

        I can’t say all are like this as some would definitely have schools on the top of their list, but they seem to gravitate towards areas where they have friends that live there and that flows on

        They are now starting to gravitate towards Burwood, Surry Hills, Camberwell

        If you go down Burke Rd you will notice a change, once they are more familiar with those areas then I expect the flow on to occur there

      • AB says:

        “Outside of the sunk private school costs, the ability to send your kids to a free public school that has been proven to provide an on par or higher ATAR outcome whilst being able to internalise the cost savings into a CGT free asset is pretty appealing…”

        I went to a selective-entry public school myself so I agree with sending kids to the school that’s likely to provide the best outcome for their learning.

        I’m always being told that these Chinese investors don’t care how much houses cost or what happens to the value of their investment so I wouldn’t have thought the cost of private schools would have much influence on the decision.

        Besides, why not earn 10% p.a. (or whatever) CGT-free on a $3,000,000 house in Hawthorn rather than a $1,000,000 house in Glen Waverley?

      • AB says:

        @OMG, your explanation makes a lot of sense – thanks.

      • fewlish says:

        I think that the broad generalisation of ‘rich Chinese investor’ will slowly dissipate as the more examples of other types come into play. It is easy to categorise foreign buyers into one slot but I have found a few examples of families wanting an education they couldn’t get at home immigrating in and being prepared to pay a premium.

        Not super rich, but perhaps with a million or so (probably still quite wealthy by home standards) and with education on the forefront of their minds places like GW are found to be worth that premium. Having had a few friends my age who have done the whole boarding at Scotch thing (parents in Malaysia) its pretty easy to see off a $700k AUD over 12-14 years (plus forex headaches) PER CHILD and they haven’t ended up with a house at the end!

      • drsmithy says:

        Not super rich, but perhaps with a million or so (probably still quite wealthy by home standards) [...]

        If you’ve got a million AUD in cash, you’re quite wealthy by any standards.

        “Not super rich”, perhaps, but certainly well ahead of 95% or so of the population.

      • OMG says:

        AB, true, I’d also be looking at those areas instead of GW

        Recently a home in GW sold for $2.18 million and I thought hmm could have bought a nice house in Malvern for that and had half a mil left over

        I think they need to feel comfortable with the area and would listen to their peers when seeking advice

        I guess moving to a new country they want to be where their friends live, understandable

        Some do, if not all I have met, have an interestingly stubborn view on property, I say prices go up for a while and then can be flat for 5 years, as had happened, they don’t believe, they have an unwavering belief in Melbourne property, more a conviction that prices will rise and rise and this is why they are very confident in bidding prices up so high in these areas

    • chriso says:

      “there would be a lot of property investors that would love to see stamp duty and CGT removed, that would definitely bump up prices”

      You missed the quid pro quo which is that these taxes be replaced by a land tax. Land tax reduces land value.

  3. George says:

    What are council rates if not a land tax?

    • krazy.galah says:

      They are imposed to pay for local services. A land tax makes sense in that it could replace a raft of taxes if priced sensibly including the illogical stamp duty. That way there is less tax avoidance that seems a sport in Australia. After all you can hide cash but not land.

      • Andy! says:

        +1 you cannot hide the land. Tax land/wealth, not labour.

      • hamish says:

        That might be a way of introducing it.

        Call it State Land Rates (or something along those lines) rather than land tax, and have it replace stamp duty and regular council rates, with the state govt collecting and distributing the revenue to local councils along the lines of how the GST is administered.

      • DMc says:

        There are already state-based land taxes. Owner occupiers are exempt.

        Land tax

        All States except for the Northern Territory levy land tax on the total holding of unimproved land value, excluding principal residences. Land used for primary production is exempt or deductible in all States. Other exemptions include caravan parks and aged care facilities in some States. Most jurisdictions also have tax‑free thresholds. Land tax rates are generally progressive. In assessing the value of land, the States either take the value at a specified time in the year or an average of the value over the previous three years.

    • George says:

      Then local government – the only level of government without constitutional recognition – is the only level that is taxing on a sustainable basis?

      But local government is far from financially stable and sustainable in the modern Australian polity.

      I suspect that the lack of viability of this revenue model thus far foretells the consequence of its expansion to state or national level.

      • DMc says:

        Local government budget problems are more to do with volatile expenditure rather than uncertain income.

        But yes, council rates and GST are the two most predictable and stable income streams for any level of government, AFAIK.

      • JohnsonM says:

        I realyl don’t know much about local government budgetary issues.

        How do you know local governments are not financialyl stable, and is this a rule or a minority giving the rest a bad name?

      • George says:

        @JohnsonM

        The LGA amalgamation and de-amalgamation issue is a running sore up here in Queensland.

        LGA authority support (to overcome lack of viability) was one of the first initiatives of the incoming Whitlam government (way back then) and the issue has slipped out of and come back into the policy sphere from time to time ever since.

        Currently through all states, most LGAs are heavily supported by the respective state / territory governments, but that is an uneasy arrangement as LGAs exist only by an Act of the relevant State (see the QLD issues mentioned above).

        Hence my point, if the land-tax-style-levy called RATES, doesn’t work at LGA level. Could it work at state or national level?

        It’s a question, not an ideological position.

      • hamish says:

        I thought local govt budget issues were mostly because state governments have imposed caps on their rates? So they have had to claw some of the shortfall back via things like upfront development charges.

      • DMc says:

        @hamish,
        I’m looking at it from a WA perspective (no cap on rates here). You may be right for other states.

  4. speculator says:

    “Education is the greatest force that we’ve developed, not only for boosting productivity, but also for making Australia more equal” ensuring “the circumstances in which you’re born don’t determine the circumstances in which you die.”

    there was a big news yesterday:

    New rich are Australia’s tradies, miners, and construction workers

    education, productivity and competitiveness? really?

    http://www.news.com.au/finance/money/new-rich-are-australias-tradies-miners-and-construction-workers/story-e6frfmd9-1226345358887

    • TheJoneses says:

      Yep.
      Forget about learning tech skills or starting a business.

      It’s all about “equity, mate!”

    • Prometheus69 says:

      ” New rich are Australia’s tradies, miners, and construction workers. ”

      Cashed up bogans … they never had it so good.

  5. DMc says:

    The “back to the beginning” section has a very warped assessment of cash flows. The writer seems to be implying the tax-payer is paying for the capital gains of property near good schools. Quite a strange view to take.

    I agree with the conclusions though; land tax is the way to go and probably the fairest tax one could imagine, slightly ahead of a consumption tax. If we had nothing but GST, land tax, mineral royalties, plus a tax on any money leaving the country, would anybody be unhappy?

    During the RSPT debate it was often said that ‘the minerals belong to all Australians’. How does the land we occupy not ‘belong to all Australians’ in the same way?

    • spleenblatt says:

      The writer has stated gains are capitalised in rising land values, which flow directly to the individual homeowner not the school or community. There is a cash flow into the school funded by taxpayers, there is a revaluation of an asset which accrues to the individual. In what way is that assessment warped?

      • DMc says:

        In what way is that assessment warped?
        Because there is no more government cash flowing into that school (per student) than for any other school.
        The capital gain is coming from other people willing to buy into the area, not from government.

      • spleenblatt says:

        Government funding of schools is not static, it varies based on location and other criteria. Some schools do in fact receive more funding per student. Regardless, to the extent a location’s desirability and demand is strongly influenced by the quality of that school, the cash flow to the school is funded by the taxpayer, the revaluation of the asset accrues to the individual.

      • DMc says:

        it varies based on location and other criteria
        Yes, and a high-achieving school in a wealthy area is likely to get less funds per student.

        The value of the nearby land is influenced by the reputation of the school but that school’s reputation is not a result of receiving more funds than any other school. It is not government funds that have caused the increase in land value otherwise every school would be having the same effect on its surrounding land.

        If it was school funding that caused land value increases, then differential value increase must be caused by differential school funding. There is no differential school funding in favour of high-achieving schools, ergo school funding is not the cause of the increase in land value.

        You can say the high land value is caused by school reputation. You cannot say that the school reputation is a result of government funding.

      • spleenblatt says:

        a high-achieving school in a wealthy area is likely to get less funds per student.

        Nope. Just as likely to get more per capita based on the arrangement they have negotiated with the government.

        Of course a school’s reputation is influenced by how much funding it receives (its capacity to provide services), although that is not always a necessary condition.

        Never said school funding of itself was the cause of the increase in land value. There is more demand in catchments with good schools. Those schools cannot exist without government funding. The increase in property values attached to being in that catchment accrues to the individual. The argument in this article is that more of that revaluation should be captured via the taxation system to acknowledge that at least some of that property’s value is supported by the government funds that sustain the infrastructure that makes it a desirable location.

      • DMc says:

        Just as likely to get more per capita based on the arrangement they have negotiated with the government
        Not where I live. In my state, schools receive operational funding on a per-capita basis with adjustments for high-need students, remote location etc. There is no negotiation and schools in wealthy areas tend to receive less funds per student unless they have a high number of disabled or indigenous students, or there is some other similar factor.

        Never said school funding of itself was the cause of the increase in land value.
        That is exactly what the original writer was saying. It is incorrect.

        She also asserts that fringe suburb schools are underfunded… whilst underfunded schools, in the over populated ‘fringe’ suburbs … there is also little basis for this, as they receive funds according to the same formula as every other school.

      • spleenblatt says:

        At a State level that might be true, at a Commonwealth level it’s a completely different ball game. Catholic and Independent schools have absolutely negotiated favourable funding arrangements which means they can and often do receive higher per capita funding from the Commonwealth than would otherwise be implied by their socio economic ranking.

      • DMc says:

        Catholic and Independent schools generally don’t have catchment areas, so are totally irrelevant to the discussion of a house value being related to a catchment zone.

        In any event, the writer was talking about a house which is, in her own words, located in a top government school zone, so the discussion is about finding of government schools.

      • spleenblatt says:

        Well, it’s relevant in as much as you’re arguing that all schools receive the same per capita funding and that funding per student reduces for private schools in wealthy areas. That ain’t so. But fine, let’s use the term catchment to refer to the suburb(s) proximate to the desirable school (state, catholic or independent) as opposed to a geographical boundary prescribed by government to manage enrolment numbers. The same logic still applies as it does to the top government school referred to here – the cash flow is from government to school, the asset revaluation related to that school’s contribution to demand for property in that catchment accrues to the individual.

      • DMc says:

        it’s relevant in as much as you’re arguing … that funding per student reduces for private schools in wealthy areas.
        At no point was I talking about private schools. I was referring to government schools. You are the only one talking about private schools.

        let’s use the term catchment to refer to the suburb(s) proximate to the desirable school (state, catholic or independent)
        No, let’s not do that. I’m not talking about independent schools. The writer was not talking about independent schools. You are the only one talking about independent schools.

        the cash flow is from government to school
        If you are talking about government schools, which everyone involved except you is doing, then as I have said above the increase in school reputation is not due to receiving more government funds than any other school. It receives funding in proportion to the number of students; it is not being subsidised by anybody that lives outside the catchment area.

  6. yogiman says:

    Once you own an investment property, it is never rational to sell it.
    Suppose the property is worth $600K and can be rented out for $600 per week. If the property is sold, the buyer will have to pay $22k in stamp duty and the seller will have to pay between $6k and $10k in commission. Therefore, the sale could only take place if the buyer perceives the property to be worth more than $622k and the seller perceives it to be worth less than $590k. A discrepancy in perception of this magnitude is not possible unless one of the parties is severely deluded.
    Am I missing something?

    • DMc says:

      Am I missing something?
      Yes.

      $590k after you’re dead is worth the same as $0 today (unless you place value on passing on an inheritance). You need to sell the property while you still have time to spend the proceeds for it to be of any value at all.

    • squirell says:

      i rented properties worth 1.2 million that yielded $600 per week. In that scenario you could have improved yield threefold simply by parking the money in high dividend blue chips (fourfold if you take account of franking dividends and the fact that rental property needs maintenance, rates to be paid etc).
      … proeprty is only viable due to govt sponsored ponzinomics and low int rates, but even then there are far better options elsewhere.

    • JohnsonM says:

      Umm.

      If you expected prices to even stay the same for five years a cost-benefit analysis would probably show that it is rational to sell it.

      Yields are abysmal on property, if you’re not getting capital growth you’re losing money to inflation and debt servicing every single day.

  7. Lori says:

    Excellent analysis. You have eyes for the reality.

  8. Catherine Cashmore says:

    FYI – Balwyn North